Bailout for Spain & Italy is a Prelude to ‘German Empire’

Topher Morrison
PurpleSerf.com

The London Telegraph’s Bruno Waterfield breathlessly reported as many other news outlets had that “On Thursday night, Italy and Spain plunged an EU summit into disarray by threatening to block “everything” unless Germany and other eurozone countries backed their demands for help.

 

How much “disarray” there in fact was is debatable.  Whether the “threat” to “block ‘everything’” had any real teeth or motivation is similarly – dubious.  The cynicism is due to the fact that in Europe all boats rise and fall together.  The German economy relies heavily on exports of which 60% comes from the Eurozone, conversely the Eurozone relies on a growing and healthy consumer base in Germany to buy their exports.

While German Chancellor Angela Merkel and her finance minister Wolfgang Scheauble have balked at mutualization of debt across the eurozone they have signaled it could become more palatable if stricter controls and robust accountability were imposed on individual countries’ spending and borrowing.  Who will decide those controls and regulations will undoubtedly be heavily influenced by Europe’s largest and most healthy economy why any centralization of power may lead to a new “German Empire”.

Motivating factors, however, have seemingly come into play and begun to melt German resistance to common borrowing and other similar proposals and may even lead Germany to rethink their own constitution, which precludes them from such activities.  Fox News reports many analysts:

“…think a downturn would force more Germans to recognize how much they depend on other European nations to buy their goods and support the German economy. They could become more willing to jointly accept the risks of backing weaker countries’ debts.”

Indeed as German business optimism fell in June due to a slowing in manufacturing, at the heart of their export led growth, look for more capitulation like the agreement reached on Friday to save Italy and Spain.

According to the Telegraph:

"Under the deal [reached at the EU summit on Friday], Spanish banks will be recapitalised directly by allowing a €100 billion EU bailout to transferred off Spain’s balance sheet after the European Central Bank takes over as the single currency’s banking supervisor at the end of the year."

The decision detailed in a seven-page document by the “Gang of Four” EU presidents aims at putting the Eurpoean Central Bank (ECB) at the center of a “effective single supervisory mechanism.”  The summit rationalized the move: “We affirm that it is imperative to break the vicious circle between banks and sovereigns.”  How yielding sweeping controls and expansive powers over to a central bank will address the underlying problem of competition, innovation and growth is not addressed in the document.

Relief for Spain was accompanied by promises to purchase Italian bonds using EU bailout funds in order to reduce Italy’s borrowing costs and to “examine the situation of the Irish financial sector” offering possible relief to Ireland by relieving the government balance sheet debt burden.

 

Herman Van Rompuy, the president of the European Council of EU leaders and one of the Gang of Four who crafted the European Federation document to be formally presented in December, lauded the agreement as an important step “to reassure markets and to get again some stability around the sovereign bonds of our member states.”

He did, however, warn the new aid measures would be reserved for “countries that behave themselves” by abiding by the EU’s fiscal rules and austerity measures, but without sticks so far and bailout after bailout seemingly without end these milquetoast threats have had all the credibility of a spoiling mother.   Considering the clear interdependency in the eurozone and the propensity to kick the can down the road one must wonder what “controls” and “accountability” will be incorporated later this year.  But if the economic conditions worsen, especially for Germany look for more bailouts and “draconian” control measures of which all will color the character of this new economic empire.

Estonia Set to Overtake US Economy

Topher Morrison
PurpleSerf.com

Estonia might not be large, but it serves as a big lesson
to its neighbors and to the world.
Image Source: Prescottenews.com

This prediction may be more than premature, but this Baltic Tiger has much to teach Europe and the United States about how to grow an economy.  Virtually entirely self sustaining and enjoying robust growth, almost zero debt, and plunging unemployment rates this tiny country is a state apart from a European Union in fiscal tumult and a languishing US. 


          Estonia has had anything, but an easy history.  For roughly 700 years a once independent Estonia served successive conquerors as agrarian serfs until the 1920s when the Estonian government paid off their German landlords and restored home rule.  Estonia decentralized and modernized its economy only to breathe one fresh breath of freedom until the Soviet Union and their former Nazi overlords returned with ghoulish force.  


          After allied victory in World War II the USSR illegally annexed and plundered Estonia, deported tens of thousands, centralized its economy, and sequestered civilians under iron hard tyranny.  A ravaged country, Estonia was finally able to achieve independence in 1991 after the Singing Revolution, which initially featured spontaneous mass choirs singing illegal songs of patriotism and culminated years later in over 2 million people linked hand-in-hand over Estonia, Latvia, and Lithuania. 


          During the 1990s Estonia embarked on the path of privatization handing over state owned industries to the Estonian people.  In 1995, one year after the last Russian troops left Estonia, the revitalized economy began to grow at 4.6% and skyrocketed in 2007 to 10.4%.  After sustaining a brief contraction of 0.7% in 1999, Estonia from 2000 to 2007 averaged supercharged growth upwards of 8.3%!  


          If you were to dissect this engine of true capitalism (to be contrasted with crony capitalism found in China and the US) you would find that very little of any one part of the economy is favored.  Estonia features a constitutionally mandated balanced budget, the highest levels of internet freedom, one of the world's first flat tax systems (the government has just approved to cut income tax from 21% to 20% by 2015), an open banking system allowing for generous foreign investment, and unlike the United States (sitting on unparalleled and untouched oil reserves) Estonia is self sustaining supplying 90% of their energy from local oil shale.  Aside from the obvious structural and political advantages Estonia benefits from frugal politicians more interested in seeing their country grow than growing their government.  


          The most important characteristic of this economy, however, is its resilience.  Because it is no longer burdened by a centralized economy and slowed down by immense bureaucracy Estonia has shown an uncanny ability to bounce back.  In 2009 the economy plummeted by an abysmal 14%, due to easy lending and over speculation, but as of the first quarter of 2011 the Estonian economy exhibited traditionally strong growth at 8.5% (highest in the EU) and sent its unemployment rate from 18.8% to 13.8%.  While the unemployment remains high, national debt is at a remarkable 6.6% of GDP (lowest in the EU) recently earning Fitch's, a rating agency, A+ rating.  


          Today, the United States Congress just increased its ability to take on more debt by the largest margin in US history.  The fact that US leadership isn't at least taking clues from the mess in Spain, Greece, and Italy who's debts are 60%, 120%, and 142% respectively and are clamoring for bailouts to stave off open revolt is astonishing.  Take a peak at someone else's playbook for once - its not cheating in the real world, its smart.